How Does Negative Gearing Work in Australia? (2026 Worked Example)

Negative gearing in Australia comes down to one formula: net rental loss × your marginal tax rate. The Australian Taxation Office lets you offset a loss on an investment property against your salary, lowering your overall tax bill — so the real out-of-pocket cost of holding the property is the loss minus the tax refund. This guide walks the method step by step, runs a $700,000 worked example, and answers the questions Australians Google most: "how much tax do I save?", "is it actually worth it?", "what's the depreciation trick?"

2026 update. From 1 July 2027, negative gearing on established residential property acquired after 7:30pm AEST 12 May 2026 will be quarantined — losses no longer offset salary. Properties owned on 12 May 2026 are grandfathered, and new builds keep full negative gearing. See Negative Gearing Changes 2026 for the full Budget detail. The mechanics below describe the current rules, which continue to apply for grandfathered properties for life.

The formula

Annual loss     = (gross rent − vacancy) − (interest + running costs + depreciation)
Tax refund      = annual loss × (marginal rate + 2% Medicare levy)
Net out-of-pocket = annual loss − tax refund

• Gross rent — weekly rent × 52, then subtract a vacancy allowance (commonly 2–4 weeks).
• Interest — on an interest-only loan, the entire repayment is deductible. On P&I, only the interest portion is.
• Running costs — council and water rates, building and landlord insurance, body corporate (strata), property management, repairs and maintenance, advertising and bookkeeping.
• Depreciation — non-cash deduction on building structure (Division 43) and plant and equipment (Division 40).
• Marginal rate — your tax bracket on the last dollar of income, plus the 2% Medicare levy. The refund stacks at the top of your income.

Step by step

Step 1 — Work out effective rent

Start with weekly rent times 52 to get gross annual rent. Subtract a realistic vacancy allowance — most rental analyses assume 2 to 4 weeks of vacancy per year, even for well-located properties. The result is your effective rental income.

Step 2 — Add up annual deductions

Every dollar of allowable expense reduces taxable income. The main lines:

• Interest expense — by far the biggest deduction on most investment properties
• Council rates and water charges — typically $2,500–$4,500 combined
• Building and landlord insurance — $1,200–$2,000
• Body corporate (strata) fees if applicable — $2,500–$6,000+
• Property management — typically 6–9% of gross rent in most states
• Repairs and maintenance budget — actual costs only; capital improvements depreciate over time rather than deduct in year one
• Depreciation — from a quantity surveyor's schedule (more below)

Step 3 — Calculate the net rental loss

Effective rent − Total deductions = annual loss. A negative number is the loss the ATO lets you offset against your other income.

Step 4 — Apply your marginal tax rate

The loss reduces your taxable income at your top bracket. The 2025–26 resident brackets:

Taxable income	Marginal rate
$0 – $18,200	0%
$18,201 – $45,000	16%
$45,001 – $135,000	30%
$135,001 – $190,000	37%
$190,001+	45%

Add the 2% Medicare levy on top for most earners. Because the deduction comes off the top of your income, the effective refund rate is your marginal rate plus 2%.

Step 5 — Net out-of-pocket cost

Annual loss − tax refund = the real cash cost of holding the property. That number — not the gross rental loss — is what you have to fund from elsewhere each year.

A full worked example: $700,000 investment property

A typical investor on a $135,000 salary (37% bracket) buys a $700,000 unit with a $560,000 interest-only loan at 6.5%. Annual numbers:

Item	Amount
Gross rent ($600/wk × 52)	$31,200
Less ~3 weeks vacancy	−$1,800
Effective rent	$29,400
Loan interest ($560,000 × 6.5%)	−$36,400
Council & water rates	−$3,200
Insurance (building + landlord)	−$1,500
Body corporate (strata)	−$3,000
Property management (7% gross)	−$2,058
Repairs and maintenance	−$1,500
Depreciation (typical new build)	−$8,000
Total deductions	−$55,658

Step 3 — Net rental loss: $29,400 − $55,658 = −$26,258

Step 4 — Tax refund at 37% + 2% Medicare = 39% effective rate: $26,258 × 39% = ~$10,240

Step 5 — Net out-of-pocket per year: $26,258 − $10,240 = ~$16,000

That's the real cash cost of holding the property — about $308/week out of pocket after the ATO refund.

The depreciation portion is the hidden lever: $8,000 of the deductions involved no cash outflow, but generated $3,120 of refund. Without the depreciation schedule, the same property would cost an extra $3,120/year out of pocket.

Marginal rate determines the benefit

The same $10,000 annual loss is worth very different amounts depending on your taxable income — Medicare levy included:

Marginal bracket	Refund on $10,000 loss	Refund on $20,000 loss
16% (income $18k–$45k)	$1,800	$3,600
30% (income $45k–$135k)	$3,200	$6,400
37% (income $135k–$190k)	$3,900	$7,800
45% (income $190k+)	$4,700	$9,400

This is why negative gearing is structurally most attractive to high-income earners. A $20,000 loss costs a top-bracket earner $10,600 net; the same loss costs someone in the 30% bracket $13,600 net. The ATO carries more of the burden at higher brackets.

Why negative gearing only works with capital growth

The worked example shows ~$16,000 leaving your wallet every year to hold the property. Over 10 years that's $160,000 of after-tax dollars funded from your salary. For the strategy to actually pay off, the property's capital growth has to exceed:

1. The cashflow losses you've funded ($160,000)
2. Capital gains tax on the eventual sale — under current rules, taxable gain × 50% × marginal rate
3. Selling costs (agent commission, marketing, legal) — typically 2–3% of sale price

A $700,000 property growing at 5% p.a. is worth ~$1.14m after 10 years — a $440,000 gross gain. After 50% CGT discount and selling costs the net gain is roughly $280,000–$320,000. Subtract the $160,000 of cashflow losses and the strategy nets ~$120,000–$160,000 over the decade.

The same property growing at only 2% p.a. is worth ~$853,000 after 10 years — a $153,000 gross gain. After CGT and selling costs, ~$95,000 net. Subtract the $160,000 of cashflow losses and you're ~$65,000 worse off than if you'd never bought.

The single thing that breaks negative gearing is buying in a low-growth area. The annual tax saving is real, but it isn't enough on its own — capital growth has to do the heavy lifting.

Interest-only vs P&I on investment loans

For investment, interest-only loans dominate because the entire repayment is tax-deductible. P&I splits into:

• Deductible — the interest portion of each repayment
• Non-deductible — the principal portion (you're effectively buying down equity with after-tax dollars)

Only the interest piece feeds the negative gearing calculation. So the same $560,000 loan at 6.5% delivers different tax outcomes:

• Interest-only: $36,400/year interest, all deductible
• P&I (30 years): ~$42,400/year total repayment, of which ~$36,200 is interest in year 1 (declining), ~$6,200 is principal (non-deductible)

Year-one tax-deductible cashflow is similar, but by year 10 of the P&I loan, only ~$30,000 of the annual repayment is interest — the rest is principal repayment that doesn't help the rental loss. Most investors with a growth strategy default to IO for as long as the lender permits (typically 1–5 years on investment loans before mandatory reversion to P&I).

Depreciation: the silent tax benefit

Depreciation is a non-cash tax deduction on the building's structural value and on plant and equipment items. Two regimes:

• Division 43 (capital works) — 2.5% per year over 40 years for buildings constructed after 17 July 1985. A $400,000 build value generates $10,000/year of capital works deduction.
• Division 40 (plant and equipment) — appliances, carpets, blinds, hot water systems, air conditioning. Depreciated over each item's effective life.

A quantity surveyor's depreciation schedule costs $500–$700 and is itself a deductible expense. For a new build, depreciation alone delivers $8,000–$15,000 in year one and meaningful deductions for the next 25 years.

The 2017 rule change: Division 40 (plant and equipment) deductions are restricted to the original purchaser of a new dwelling. If you buy an established second-hand property, you cannot claim Division 40 on the existing fittings — only Division 43 (capital works) on the structure. New builds therefore have a structurally larger depreciation benefit than established property.

If you've owned an investment property for years without a depreciation schedule, you've almost certainly missed thousands of dollars in refunds. It's usually worth getting one done — and the ATO allows backdated claims for up to two prior financial years via amended returns.

How negative gearing interacts with borrowing capacity

A negatively geared property usually reduces your borrowing capacity for the next loan, despite the tax benefit. Why:

• Lenders take gross rental income at 70–80% to discount vacancy and costs
• Lenders count the full loan repayment as a commitment
• Net effect: the loan repayment normally exceeds the haircut rental income, so the property consumes capacity

Some lenders apply a negative gearing add-back — they treat the cashflow loss as a notional benefit because the salary refund effectively services part of the gap. The treatment varies enormously between lenders. The same applicant can get a $100,000+ swing depending on whether their preferred lender applies an add-back.

Model both scenarios with the borrowing capacity calculator and discuss the lender choice with a broker before stacking a second investment loan on top of a negatively geared first.

Negative vs positive gearing vs neutral

Position	Rental income vs expenses	Tax effect	Strategy
Negatively geared	Rent < expenses	Loss reduces other income	Capital growth play
Neutrally geared	Rent ≈ expenses	Minimal tax impact	Bridging position
Positively geared	Rent > expenses	Net income added to tax bill	Yield/cashflow play

Most properties cycle through these states over a long hold: starting negatively geared when interest costs and depreciation are high, drifting toward neutral as rent grows and the loan balance shrinks, and eventually turning positive in the back third of the hold. The tax treatment is a consequence of the cashflow position, not a goal in itself.

What this calculator does

The negative gearing calculator above lets you model your exact scenario:

• Gross rental income with optional vacancy allowance
• Interest portion of repayments (auto-calculated from loan amount and rate)
• Council rates, water, insurance, body corporate, management
• Repairs and maintenance budget
• Depreciation (capital works + plant and equipment estimate)
• Marginal tax bracket auto-detected from taxable income
• Final net out-of-pocket cost per year

For the borrowing-side modelling — how an investment property affects your future borrowing capacity — see the borrowing power calculator and the how much can I borrow guide. For the CGT side on exit, see the CGT projection calculator and the CGT method guide.

Frequently asked questions

The FAQs above cover the most common negative-gearing questions — the formula, salary-bracket impact, depreciation, IO vs P&I, borrowing-capacity interaction, and the Budget 2026 changes. For the policy side, see Negative Gearing Changes 2026.

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This article provides general information current at 30 June 2026 and does not constitute personal tax, legal or financial advice. Negative gearing rules change for established residential property acquired after 7:30pm AEST 12 May 2026 — see the Budget 2026 article. Seek advice from a registered tax agent before making investment decisions.